Code of Maryland Regulations
Title 09 - MARYLAND DEPARTMENT OF LABOR
Subtitle 03 - COMMISSIONER OF FINANCIAL REGULATION
Chapter 09.03.06 - Mortgage Lending
Section 09.03.06.27 - Enhanced Prudential Standards for Certain Mortgage Servicers
Universal Citation: MD Code Reg 09.03.06.27
Current through Register Vol. 51, No. 19, September 20, 2024
A. Definitions.
(1) In this regulation, the following terms
have the meanings indicated.
(2)
Terms Defined.
(a) "Agency" means Fannie Mae,
Freddie Mac, and Ginnie Mae.
(b)
"Allowable assets for liquidity means" those assets that may be used to satisfy
the liquidity requirements herein, including unrestricted cash and cash
equivalents and unencumbered investment grade assets held for sale or trade
(for example, agency MBS, obligations of Fannie Mae or Freddie Mac, or U.S.
Treasury obligations).
(c) "Board
of directors" means the formal body established by a covered institution that
is responsible for corporate governance and compliance with this
regulation.
(d) "Covered
institution" means a licensee who is a mortgage servicer with servicing
portfolios of 2,000 or more one-unit to four-unit residential mortgage loans
serviced or subserviced for others, excluding whole loans owned, and loans
being interim serviced prior to sale as of the most recent calendar year end,
reported in the NMLS Mortgage Call Report, and who operates in two or more
states, districts, or territories of the United States, either currently or as
of the prior calendar year end.
(e)
"Fannie Mae" means Federal National Mortgage Association.
(f) "FHFA" means the Federal Housing Finance
Agency.
(g) "Freddie Mac" means
Federal Home Loan Mortgage Corporation.
(h) "Ginnie Mae" means Government National
Mortgage Association.
(i) "Interim
serviced prior to sale" means the activity of collecting a limited number of
contractual mortgage payments immediately after origination on loans held for
sale but prior to the loans being sold into the secondary market.
(j) "Mortgage Call Report" means the
quarterly or annual report of residential real estate loan origination,
servicing, and financial information completed by companies licensed in
NMLS.
(k) "Mortgage-backed
security" or "MBS" means a financial instrument, often a debt security,
collateralized by residential mortgages.
(I) "Operating liquidity" means the funds
necessary to perform normal business operations, such as payment of rent,
salaries, interest expenses, and other typical expenses associated with
operating the entity.
(m)
"Residential mortgage loans serviced" means the specific portfolio or
portfolios of residential mortgage loans for which a licensee is contractually
responsible to the owner or owners of the mortgage loans for the defined
servicing activities.
(n) "Reverse
mortgage loan" has the meaning stated in Commercial Law Article, §12-1201, Annotated
Code of Maryland.
(o) "Risk
management assessment" means a functional evaluation performed under the risk
management program and any report thereof provided to the board of directors
under the relevant governance protocol.
(p) "Servicing liquidity" or "liquidity"
means the financial resources available to the licensee to meet such financial
obligations as may arise from the servicing of mortgage loans, including, but
not limited to, acquiring and financing MSRs, hedging costs associated-with the
MSR asset and financing facilities, including margin calls, and advancing or
financing the advance of principal, interest, taxes, insurance, and any other
servicing related advances.
(q)
"Subserviced for others" means the contractual activities performed by
subservicers on behalf of a servicer or MSR investor.
(r) "Tangible net worth" means total equity
less receivables due from related entities, less goodwill, and other
intangibles, less pledged assets.
(s) "Whole loans" means those loans for which
a mortgage and the underlying credit risk is owned and held on the balance
sheet of the entity with all ownership rights.
B. Applicability - Exclusions.
(1) This regulation shall be applicable to
covered institutions as defined. For entities within a holding company or
affiliated group of companies, applicability shall be at the covered
institution level.
(2) The
following exclusions apply:
(a) This
regulation does not apply to a not-for-profit mortgage servicer or a housing
finance agency.
(b)
§C of this
regulation does not apply to a mortgage servicer solely awning and/or
conducting reverse mortgage loan servicing, or the reverse mortgage loan
portfolio administered by a covered institution or the whole loan portion of
portfolios.
C. Financial Condition.
(1)A covered institution shall maintain
capital and liquidity in compliance with this section.
(2) For the purposes of complying with the
capital and liquidity requirements of this section, all financial data shall be
determined in accordance with generally accepted accounting
principles.
(3) A covered
institution that meets the FHFA Eligibility Requirements for Enterprise
Single-Family Seller/Servicers for capital, net worth ratio, and liquidity,
regardless of whether the covered institution is approved for Fannie Mae or
Freddie Mac servicing, meets the requirements of §C(1) and (2) of this
regulation.
(4) A covered
institution shall maintain written policies and procedures implementing the
capital and servicing liquidity requirements of this section. Such policies and
procedures shall include a sustainable written methodology for satisfying the
requirements of §C(3) of this regulation and be available to the
Commissioner upon request.
(5)
Operating Liquidity.
(a) A covered institution
shall maintain sufficient allowable assets for operating liquidity in addition
to the amounts required for servicing liquidity, to carver normal business
operations.
(b) A covered
institution shall have in place sound cash management and business operating
plans that match the size, operational complexity, and overall risk profile of
the covered institution to ensure normal business operations.
(c) A covered institution's management shall
develop, establish, and implement plans, policies, and procedures for
maintaining operating liquidity sufficient for the ongoing needs of the covered
institution. Such plans, policies, and procedures shall contain sustainable,
written methodologies for maintaining sufficient operating liquidity and be
available to the Commissioner upon request.
D. Corporate Governance.
(1) Each element of a covered institution's
corporate governance shall be commensurate with the size, operational
complexity, and overall risk profile of the covered institution.
(2) Any documentation, controls, policies,
procedures, requirements, audits, reports, or other materials included in this
regulation shall be made available to the Commissioner upon the Commissioner i
request.
(3) For purposes of this
regulation, the operational complexity and risk profile of a covered
institution shall, in part, be defined by the results of regulatory
examinations, external audits, and internal audits.
(4) A covered Institution shall establish and
maintain a board of directors responsible for oversight of the covered
institution.
(5) For a covered
institution that is not approved to service loans by Fannie Mae, Freddie Mac,
or Ginnie Mae, or if these agencies have granted approval for a board
alternative, an institution may establish a similar body constituted to
exercise oversight and fulfill all board of directors' responsibilities in this
section.
(6) In addition to any
other responsibilities required of the board of directors under State or
federal law, or these regulations, the board of directors shall be responsible
for:
(a) Establishing a written corporate
governance framework, including appropriate internal controls designed to
monitor corporate governance and assess compliance with the corporate
governance framework;
(b)
Monitoring and ensuring institution compliance with the corporate governance
framework and these regulations; and
(c) Accurate and timely regulatory reporting,
including the requirements for filing the Mortgage Call Report.
(7) Internal Audit.
(a) The board of directors shall establish
internal audit requirements that are appropriate for the size, complexity, and
risk profile of the covered institution.
(b) Internal audit functions shall be
performed by employees of the covered institution who report to the board of
directors or its authorized equivalent under this section and who are not
otherwise supervised by the persons who directly manage the activities being
reviewed.
(c) Employees performing
internal audit functions shall have sufficient knowledge, training, and
resources to provide a reliable evaluation of the covered institution's
operations, risk management, internal controls, and governance
processes.
(8) External
Audit.
(a) A covered institution shall receive
an external audit, which shall include audited financial statements and audit
reports, conducted by an independent public accountant annually.
(b) The external audit shall include at a
minimum:
(i) Annual financial statements
including a balance sheet, statement of operations (income statement), and cash
flows, including notes and supplemental schedules prepared in accordance with
generally accepted accounting principles;
(ii) Assessment of the internal control
structure;
(iii) Computation of
tangible net worth;
(iv) Validation
of MSR valuation and reserve methodology, if applicable;
(v) Verification of adequate fidelity and
errors and omissions (E&O) insurance; and
(vi) Testing of controls related to risk
management activities, including compliance and stress testing, if
applicable.
(9) Risk Management.
(a) A covered institution shall establish a
documented risk management program under the oversight of the board of
directors that identifies, measures, monitors, and controls risk sufficient for
the size, operational complexity, and overall risk profile of the covered
institution.
(b) The risk
management program shall have appropriate processes and models in place to
measure, monitor, and mitigate financial risks and changes to the risk profile
of the covered institution and assets being serviced.
(c) The risk management program shall be
scaled to the complexity of the covered institution, but shall be sufficiently
robust to manage risks in several areas, including, but not limited to:
(i) Credit risk- the potential that a
borrower or counterparty will fail to perform on an obligation;
(ii) Liquidity risk - the potential that the
covered institution will be unable to meet its obligations as they come due
because of an inability to liquidate assets or obtain adequate funding or that
it cannot easily unwind or offset specific exposures;
(iii) Operational risk - the risk resulting
from inadequate or failed internal processes, people, and systems or from
external events;
(iv) Market risk -
the risk to the covered institution's condition resulting from adverse
movements in market rates or prices;
(v) Compliance risk - the risk of regulatory
sanctions, fines, penalties, or losses resulting from failure to comply with
laws, rules, regulations or other supervisory requirements applicable to the
covered institution;
(vi) Legal
risk - the potential that actions against the covered institution that result
in unenforceable contracts, lawsuits, legal sanctions or adverse judgments can
disrupt or otherwise negatively affect the operations or condition of the
covered institution; and
(vii)
Reputation risk - the risk to earnings and capital arising from negative
publicity regarding the covered institution's business practices.
(d) Risk Management Assessment. A
covered institution shall conduct a risk management assessment on an annual
basis, concluding with a formal report to the board of directors. Evidence of
risk management activities throughout the year shall be maintained and made
part of the report, including findings of issues and the response to address
those findings.
E. Authority to Address Risk as Necessary.
(1) If risk is determined by a formal review
of a specific covered institution to be extremely high, the Commissioner may
order or direct the covered institution to satisfy additional conditions
necessary to ensure that the covered institution will continue to operate in a
safe and sound manner and be able to continue to service loans in compliance
with State and federal law and/or regulation.
(2) If risk is determined by a formal review
of any covered institution to be extremely low, the Commissioner may provide
notice that all or part of this regulation is not applicable to that covered
institution.
(3) If economic,
environmental, or societal events are determined to be of such severity to
warrant a temporary suspension of all or certain sections of this regulation,
the Commissioner may provide public notice of such temporary
suspension.
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